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Opinion: Telecom's brave new world has a familiar ring

By Catherine Harris of NZPA

Friday 2nd September 2005

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This week Telecom reminded us that a brave new world of telecommunications is close at hand.

The future involves your computer, video calling, mobiles and an upgrade of the ordinary phone system which will bring, according to Telecom, more new services than we can currently imagine. One expert suggests 80% of future communications will done via video.

Telecom will begin switching telephones to the new network in 2007, with the aim of getting everyone in the country on VoIP (Voice over Internet Protocol) technology by 2012.

For consumers, however, the bottom line is: will calling Grandma up country or your sister in London be any cheaper?

Technically it should. Those with the know-how have already been able to make huge savings on their toll calls using VoIP technology through providers like Skype.

Early users found the service was patchy but there have been big improvements in reliability, and calls can be received from traditional phone users as well as from other VoIP users, just as long as you have broadband.

Telecom also stands to make savings with the new technology. By one estimate, it should save Telecom 60%-80% in operational costs. VoIP will merge voice, mobile, broadband and Internet, meaning a lot more automation and many phone exchanges and call centres will go the way of the dinosaur.

The big question is whether they will pass those savings on to consumers. Telecom says yes.

"It was a dollar a minute to call Australia in the mid-1990s and now it's a dollar, call-them-all-weekend-as-long-as-you-want," Telecom's chief operating officer Simon Moutter said, referring to the drop in toll call prices.

"The value that customers get today is many, many times what it was only a few years ago."

Others are not so sure, given that Telecom will almost certainly have a new monopoly.

"The reason tolls are so low is that it's not where they make their money on global networks," Graeme Osborne, chairman of the Telecommunications Users Association (TUANZ), says.

"It's all about computer data that all heads round the world, the Internet. The point about pricing, any price, is that if they don't have an inherent competitive environment then they will bring it down in their timeframe and their speed."

Because Telecom already owns the physical cables that go to peoples' houses - the local loop - it is open to claims that the Government has given Telecom an unfair headstart. On the other hand, the rollout of VoIP technology is regarded as an important technological step for New Zealand.

"There is a view that says the Telecom approach is going to be the lowest cost way to get to the mass market," Osborne says.

"They've done a good job of convincing the powers that be, the parliamentarians, the Commerce Commission, to give themselves space and the time to make an investment decision without having the challenge of the entrepreneurs and the competitors trying to double-guess them."

It could also be argued that no one else is as well placed to make the investment.

TelstraClear is the only company which has tried to lay cables to create a rival local loop and investment has stalled since the company crunched the numbers. Experts expect TelstraClear will swing towards increasing mobile technology, which can now connect with the Internet.

In Europe incumbent telco companies are forced to give competitors access to their networks, but history suggests that just as Telecom has fought to keep the Government from unbundling its "local loop", and defended its mobile phone prices, it will jealously guard its new technology.

This is where the regulation debate is important. While it can be argued that a small country like New Zealand is better off supporting a strong telecommunications company as opposed to several smaller ones, it can equally be argued that the cost of new technology is vital, especially since New Zealand is already behind many other countries in terms of broadband.

Australian communications consultant Paul Budde says the Government must step in because upgrades in technology have never resulted in lower prices.

"It's the role of the Government in monopolistic markets to make sure you stimulate competition. That's where New Zealand has gone wrong.

"The technology is not available at an economic level that stimulates innovation."

Budde says it is ridiculous to argue that because Telecom builds the network, its consumers must pay the price.

"This is an essential national infrastructure that we are talking about - this is not just to make profits."

Osborne agrees that it is a future challenge as to where the Government will stand on regulating telecommunication prices.

"So far they've implied through the decision-making that they're not going to do that."

But even the Government has its limits, as a recent decision on mobile pricing from the Telecommunications Commissioner has shown.

After submissions from Telecom and Vodafone defending their "mobile termination" charges - the wholesale rate charged to other carriers to make a call from a fixed line to its mobile network - the commissioner recommended the cost should be almost halved from 27c to 15c .

Telecom responded by unveiling a secret deal - an offer to drop its mobile wholesale rates by 30% in four years if the Government does not regulate them.

If the Government doesn't step in, the only other way prices might come down is competition. Since it seems unlikely that anyone will be going head to head with a rival VoIP network, analysts expect competitors to concentrate on niche markets like mobile technology, and satellite services for areas with weak cellphone coverage.

"It's not that we won't have competition, it just won't be to every household," Osborne says.

"But who knows, in the next five or 10 years how those competing networks will go."

Will Telecom pass on the savings? Market theory suggests companies holding a monopoly are likely to keep prices as high as consumers will bear.

One alternative is to use the cheaper services of companies like Skype, a fact which Telecom acknowledges but says that's possibly at the cost of reliability. Telecom's product would be "more attuned to the sort of service that customers are used to today".

The one point everyone agrees on that VoIP is the way of the future.

"It's the only way forward. Like moving from horse and cart to car," Budde says.

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